Great Reversal! Central Banks Worldwide Are Considering Rate Hikes

How does the Iran war become a new variable for central bank rate hikes?

A few days ago, the entire financial market was frightened by the possibility that central banks around the world might turn to rate hikes, causing stocks, bonds, and gold to plummet.

First, the Federal Reserve, with Powell mentioning in the press conference that “the possibility of a rate hike at the next meeting is no longer a baseline assumption,” leading the market to believe that the Fed could shift to rate hikes at any time.

Additionally, the official statement after the meeting clearly stated:

“The development of the Middle East situation and its impact on the U.S. economy remain uncertain… If there are risks that could hinder the Committee’s objectives, the Committee stands ready to adjust its monetary policy stance as appropriate.”

This subtly reinforced the perception that the Fed is increasingly close to raising rates.

Subsequently, the Bank of Canada, Bank of Japan, and Bank of England also signaled that they are “ready to shift to rate hikes at any time to respond to inflationary risks triggered by the Middle East war.”

It can be said that the sharp rise in energy prices caused by the Iran war has become a stumbling block for central banks to continue cutting rates to stimulate the economy.

However, how much difficulty this stumbling block can create remains uncertain; even the top of the pyramid, Fed Chair Powell, could only say in response to a question at the press conference:

“(The Iran war) could have a bigger or smaller impact on the economy, much smaller or much larger. We really don’t know.”

Nevertheless, one thing is certain:

The surge in energy prices triggered by the Iran war has already significantly influenced the monetary policy decisions of leading central banks, and they are already tempted to stop cutting and start raising rates at any moment!

In fact, I have observed that the Federal Reserve, as the central bank’s central bank, has begun to “marginally tighten” its monetary policy.

This can be confirmed in two ways:

First, in stance, the Fed is becoming more hawkish on interest rates;

Second, in action, this time the Fed not only refrained from cutting rates but also implemented a “quasi-hike” operation;

Let’s start with the first point.

We all know that starting in 2024, the Fed planned to cut rates.

But:

In 2024, inflation often rebounded, and rate cuts were delayed repeatedly, finally happening in October;

In 2025, a trade war broke out, tariffs became a concern for inflation, and rate cuts were pushed to the end of the year again;

In 2026, not only did they not cut rates, but they also signaled that “the possibility of a rate hike at the next meeting is no longer a baseline assumption” (although internal discussions had occurred in January).

(US Federal Funds Rate)

Looking back at the whole process, the resistance to rate cuts by the Fed seems to be increasing, and the voting members’ stance is gradually turning hawkish:

2024 is cautious rate cutting.

2025 is a noticeable “slowdown” in rate cuts amid concerns over tariffs.

2026, I know the Iran war has a big impact, and that they can’t cut rates, but whether to hike or not is still undecided, waiting to see inflation trends.

This series of tangible changes, coupled with the escalating Iran conflict, naturally raises suspicion that the Fed might suddenly end rate cuts and switch to rate hikes!

If that’s not enough to prove the point, the recent Fed monetary policy decision at the FOMC meeting clearly illustrates the situation.

In the press conference, Powell said: “The current interest rate level is near the upper end of the restrictive and non-restrictive range.”

What does that mean?

It means the Fed recognizes that current interest rates are high enough to restrict economic growth.

And how is the Fed handling this?

By not cutting rates!

This is a blatant move to allow market interest rates to rise, while the Fed itself holds back, relying on the market’s spontaneous rate increases to perform a “quasi-hike” operation!

From these two points, it’s clear that the Fed has already accepted a tolerance for rate increases, allowing rates to go up, but is hesitant to act directly, stoking the fire of rate hikes to prevent the Iran war from causing a one-off inflation shock that might lead to overly aggressive rate hikes and economic suppression.

But regardless, the Fed is effectively tightening its monetary policy—just a bit shy of actual rate hikes, with inflation clearly on the rise!

So, will inflation really surge, and will the Fed suddenly hike rates in the future?

I believe this possibility is very high. Once the Fed really starts the rate hike cycle, it might make the same mistake as in 2022: hiking too late, then suddenly stepping on the gas pedal.

First, the possibility of rate hikes.

The core factor is the rise in energy prices caused by the Iran war, especially how long the Strait of Hormuz can be blocked.

Based on current conflict developments and Iran’s theocratic regime, Iran is likely to “coerce” public opinion to fiercely defend the Strait of Hormuz, dragging out the war until U.S. domestic war-weariness dominates, leading to ending the conflict or taking more aggressive actions to involve more neighboring countries and escalate the war. This process could easily last three to five months.

Historical experience shows that when the “oil reservoir valve” in the Middle East remains closed for a long time, oil prices will keep rising.

Many investment banks (such as CICC, Rystad Energy, etc.) predict that if the Strait of Hormuz is blocked for more than four months, oil prices could soar to $135 per barrel.

Goldman Sachs believes that every $10 increase in crude oil prices will push the U.S. CPI annual rate up by about 0.28%; GMF’s more detailed layered analysis suggests that a permanent $10 increase in oil prices directly raises overall CPI by about 0.13%; considering indirect effects on food, the total impact could be around 0.2%.

According to this standard, if oil prices rise from $70 per barrel in early March to $135, U.S. inflation could be pushed up by 2%–2.8%. Coupled with current inflation levels, U.S. inflation could again surge above 5%!

Such a level of inflation makes it hard not to hike rates!

Therefore, I believe that until the situation improves, the likelihood of the Fed moving toward rate hikes remains very high.

However, although the Fed is strongly concerned that the Iran war will push inflation higher, they still tend to see the war’s inflation impact as temporary.

In other words, the Iran war is only a “temporary” obstacle to the rate-cutting cycle.

This can be seen from their March internal economic forecast:

The Fed sharply raised this year’s inflation (PCE) forecast by 0.3% to 2.7%, and for next year by 0.1% to 2.2%, with inflation expected to stabilize around 2% after 2028.

In other words, at this moment, the Fed does not believe inflation will take off soon, but is signaling to the market with “quasi-hikes” and forward guidance: “If the unexpected happens, I will still tighten.”

From this perspective, the Fed’s actions seem somewhat less hawkish.

And this very nuance immediately reminds me of 2022.

Back then, the Fed also thought inflation was temporary, but when inflation started to surge, it suddenly raised rates from 0.25% to 0.5%, causing chaos in global commodities, stocks, and bonds.

This is a crucial point to watch!!!

In summary, the world’s leading central banks are already leaning toward rate hikes, and the Fed has effectively taken a “temporary tightening” stance. This marginal shift in monetary policy is bearish for global financial markets, except for the currencies of countries raising rates!

★ Disclaimer: The above reflects only the author’s personal views and is for informational and educational purposes only.

Source: Mikuang Investment (ID: mikuangtouzi)